How Colleges Are Buying Respect

March 4, 2010, 5:00 PM EST

ITT Educational Services (ESI) didn't pay $20.8 million for debt-ridden Daniel Webster College in June just to acquire its red-brick campus, 1,200 students, or computer science and aviation training programs.

To ITT, the third-biggest higher-education company in the U.S., the Nashua (N.H.) college's "most attractive" feature was its regional accreditation, says Michael Goldstein, an attorney at Dow Lohnes, a Washington firm that has long represented the Carmel (Ind.) company. Regional accreditation, the same gold standard of academic quality enjoyed by Harvard, is a way to increase enrollment and tap into the more than $100 billion the federal government pays out annually in financial aid.

The nation's for-profit higher-education companies have tripled enrollment, to 1.4 million students, and revenue, to $26 billion, in the past decade, in part through the recruitment of low-income students and active-duty military. Now they're taking a new tack. By exploiting loopholes in government regulation and an accreditation system that wasn't designed to evaluate for-profit takeovers, they're acquiring struggling nonprofit and religious colleges—and their coveted accreditation. Often their goal is to transform the schools into taxpayer-funded behemoths by dramatically expanding enrollment with online-only programs; most of those new students will receive federally backed financial aid, which is only available at accredited colleges.

"The companies are buying accreditation," said Kevin Kinser, an associate professor at the State University of New York at Albany who studies for-profit higher education. "You can get accreditation a lot of ways, but all of the others take time. They don't have time. They want to boost enrollment 100% in two years."

By acquiring regional accreditation, trade schools and online colleges gain a credential associated with traditional academia. Six nonprofit regional associations set standards on financial stability, governance, faculty, and academic programs. Normally the process takes five years and requires evaluations by outside professors. Most for-profits have been accredited by less prestigious national organizations. Students enrolled at both regionally and nationally accredited colleges can receive federal aid, but those at regionally accredited schools can transfer credits more easily from one college to the next.

"CREATIVE ARRANGEMENTS"

For-profit education companies, including ITT and Baltimore-based Laureate Education, have purchased at least 16 nonprofit colleges with regional accreditation since 2004. The U.S. Education Dept., which doled out $129 billion in federal financial aid to students at accredited postsecondary schools in the year ended Sept. 30, is examining whether these kinds of acquisitions circumvent a federal law that requires a two-year wait before new for-profit colleges can qualify for assistance, says Deputy Education Under Secretary Robert Shireman. Under federal regulations taking effect on July 1, accrediting bodies may also have to notify the Education Secretary if enrollment at a college with online courses increases more than 50% in one year. "It certainly has been a challenge both for accreditors and the Department of Education to keep up with the new creative arrangements that have been developing," Shireman says.

Buying accreditation lets the new owners immediately benefit from federal student aid, which provides more than 80% of revenue for some for-profit colleges, instead of having to wait at least two years. Traditional colleges are also more inclined to offer transfer credits for courses taken at regionally approved institutions, making it easier to attract students.

The regional accreditors, which rely on academic volunteers, bestow the valuable credential with scant scrutiny of the buyers' backgrounds, says Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars & Admissions Officers in Washington. While accrediting bodies treat these purchases as changes of ownership, the acquisitions, in reality, create new colleges that should be required to earn certification from scratch, Kinser says.

For accreditation to continue once the college is sold, the buyer must promise not to change its mission, says Steven Crow, former executive director of the Chicago-based Higher Learning Commission, the largest regional accreditation body. Once accreditation is maintained, the acquirer seeks permission, which is usually granted, to start branch campuses and online programs.

Obama Administration officials have recently questioned whether the present accreditation system is effective in protecting academic standards. Accrediting decisions lack transparency and take too long, Education Under Secretary Martha Kanter said in a Jan. 26 speech.

A BARGAIN

Regional accreditation is worth $10 million to a for-profit acquirer, says Michael Clifford, an education investor in Del Mar, Calif., who has participated in purchases of four nonprofit colleges. That's how much it would cost to start a regionally accredited college, a process that can take 10 years and has only a 50-50 chance of success. On top of the $10 million, buyers typically pay $23,000 to $50,000 per enrolled student, making ITT's purchase of Daniel Webster a bargain, Clifford says.

Clifford and his fellow investors popularized the strategy in 2004 by purchasing Grand Canyon University (LOPE), a Christian college in Phoenix. Enrollment has soared to 37,700 as of Dec. 31, up from 1,500 students, with 92% taking classes online. Grand Canyon, which went public in November 2008, derived 82.5% of its revenue from federal financial aid in 2009, according to a company filing.

A 2006 regulatory change fostered online growth and made takeovers more attractive. That year, Congress eliminated a rule prohibiting colleges that offered more than half of their courses online from receiving federal financial aid.

Clifford also participated in the 2008 purchase of Myers University in Cleveland, which was renamed Chancellor University. Chancellor attracted former General Electric (GE) CEO Jack Welch as an investor last year and named its new online management institute after him. Welch collaborated with faculty in developing curricula for a master's program in business administration, Clifford says. "We chose to work with Chancellor University because it gave us the flexibility to start something new," Welch said through a spokeswoman. "As a for-profit venture, we have the resources to invest in the student experience and the very best faculty." Knowledge Universe Learning Group, chaired by junk-bond pioneer Michael Milken, entered into a partnership in 2007 with regionally accredited Sierra Nevada College in Incline Village, Nev., agreeing to provide up to $15 million in return for an opportunity to share in online revenue, according to Geoffrey Moore, a senior adviser to Milken.

The regional associations scrutinize takeovers of nonprofit colleges in advance and then follow up afterward, accrediting officials say. They could recall few, if any, cases in which they refused to continue accreditation.

Corinthian Colleges' (COCO) past difficulties with California state regulators didn't matter to accreditors when it agreed last October to purchase Heald Capital, parent company of Heald College, for $395 million. Corinthian, the country's seventh-largest higher-education company by market capitalization, has more than 100 campuses in North America, and had 106,052 students, including Heald, as of Dec. 31.

Corinthian had paid a $6.5 million settlement in July 2007 to the California attorney general's office over allegedly misrepresenting graduates' job placement rates and salaries. It also agreed to cease enrolling students in 11 programs at nine campuses. Corinthian, based in Santa Ana, Calif., didn't admit wrongdoing.

The Accrediting Commission for Community & Junior Colleges in Novato, Calif., which certifies two-year institutions in California and Hawaii, approved the change in Heald's ownership. "We judge the college we accredit," says Barbara Beno, president of the commission. "It would be unfair to say, 'Heald, you've been bought by a parent corporation that doesn't have as fine a track record as you do. Therefore, we'll condemn you.'"

That "doesn't remotely satisfy the sloppiest of due-diligence requirements," says Nassirian of the American Association of Collegiate Registrars & Admissions Officers. "There is no methodical review of who has bought the college. If the Cosa Nostra applied, you would think you'd take a look."

The Higher Learning Commission, which certifies more than 1,000 colleges from Arkansas to Wisconsin, stiffened its rules on ownership changes last year. Buyers must wait anywhere from one to four years to reapply for accreditation if the college won't remain "the same animal," says President Sylvia Manning. The commission now charges a $10,000 fee for ownership changes to pay for more extensive research, and new owners must be approved by its board rather than at the staff level.

Last year, Mayes Education acquired the assets of Waldorf College, in Forest City, Iowa, an Evangelical Lutheran college with 500 students. The commission, applying its revised rules, stipulated as a condition of approval that Waldorf can't offer online-only degrees at least until the 2011-12 academic year. Mayes, a subsidiary of Columbia Southern University in Orange Beach, Ala., plans to boost Waldorf's enrollment to 2,300 students in three years through programs combining online classes with face-to-face instruction at temporary sites around the country, says company spokeswoman Jessica Brown.

Columbia Southern wasn't the only for-profit that expressed interest in buying Waldorf, says Richard Hanson, Waldorf's former president. Another company that lacked regional accreditation also contacted him: ITT Educational Services.

ITT runs 120 nationally accredited technical institutes with 80,000 students, most of whom pursue associate's degrees. The cost of attending an ITT Technical Institute, including tuition, fees, and off-campus room and board, was $26,775 in 2008-09, according to the National Center for Education Statistics. Of students who entered ITT's two-year schools in 2004, 29% graduated. ITT derived 70% of its 2009 revenue from federal financial aid.

ITT Educational Services, which declined to comment for this story, is in the preliminary stages of seeking regional accreditation for its technical institutes through the Higher Learning Commission, which sent a team to visit the company last fall, according to commission spokeswoman Susan Van Kollenburg. The commission has not yet acted on this evaluation, she says.

Daniel Webster is ITT's first regionally accredited campus. It was founded in 1965 as the New England Aeronautical Institute. Over the years the college expanded from flight instruction into training air-traffic controllers and airline managers, as well as computer science, engineering, and business. It has "a longstanding good reputation," said Gary Kiteley, executive director of the Aviation Accreditation Board International in Auburn, Ala., which licenses the college's aviation programs.

With an endowment that peaked at about $3 million in 2008, Daniel Webster relied on tuition revenues, says Robert Myers, the school's former president. The airline industry's downturn after the September 11 terrorist attacks and the collapse of Internet stocks hurt enrollment in aviation and computer science, says former provost Michael Fishbein.

Myers says he was contacted by ITT in December 2008. CEO Kevin Modany visited Daniel Webster the next month, and the parties reached agreement in April. New England accreditor Commission on Institutions of Higher Education approved the sale that same month. "It's in the public interest to have these small institutions continue to function," says Bruce Mallory, a commission member and education professor at the University of New Hampshire. "If a proprietary school can come in, continue to provide the same level of education, and assure viability, that's all for the better."

SECOND THOUGHTS

As Myers negotiated the sale, he says, he came to suspect that the company wasn't being forthright. When he and Rodney Conard, who chaired the college's board of trustees, worked out at a YMCA a week before the June closing, they discussed canceling the deal, Myers said. Conard says going through with the sale was the right decision.

According to Myers and Fishbein, Modany promised to leave Daniel Webster's administrators in charge. At a campus event introducing the ITT CEO to the college community, Modany promised there would be ample employment opportunities. In July, ITT laid off more than 20 Daniel Webster employees, Myers says. It believed they were duplicating functions that ITT's corporate offices in Indiana could provide, two people familiar with the company's thinking said. ITT also replaced Conard and the other trustees.

At the time of the layoffs, Myers was circulating a draft report questioning whether some of ITT's changes were in accord with the standards of the accreditation commission, which call for a faculty role in curriculum and governance. "ITT came in and said, 'We only want faculty to teach,'" Myers says. "We'll develop curricula in Carmel, Ind., and give them to you." On Aug. 5, ITT ousted him, he says. Nadine Dowling, director of the Woburn (Mass.) campus of ITT Tech, became interim president.

"ITT didn't really have much interest in anything other than having acquired a regionally accredited institution," says Myers, now president of the New England Culinary Institute in Montpelier, Vt. "If I had it to do all over again, I wouldn't have gone anywhere near ITT. The fundamental nature of the college has changed." Modany declined to comment.

Like other acquirers of regionally accredited colleges, ITT plans to expand Daniel Webster's online offerings. The company also expects to open more Daniel Webster campuses and to introduce new academic programs including accounting, education, and health sciences. "Regional accreditation was very important" to the company, said Goldstein, the Dow Lohnes lawyer. "I don't think there's any question that was the most attractive element."